3/04/2012

The recent sudden drops in both initial unemployment insurance claims and unemployment rates have generated a slew of positive news stories and lifted White House spirits. Fox News contributor and former Clinton pollster Doug Schoen even writes about the “high-fiving in the White House.”

But other numbers show a much weaker job market and economy; the average unemployment duration remains near its all-time high, hiring is stuck near record lows, and there are almost 3 million workers in part-time rather than full-time jobs. Further, GDP grew just 1.7% last year and few new companies are being started.

So which scenario is right?

First, let us set one thing straight. The apparent contradiction between a falling unemployment rate and other indicators isn’t because the Obama administration “manipulates numbers to get [the] unemployment headline under 9%” as Rush Limbaugh claims. The current "recovery" is so unusual that the normal rules for relating the unemployment rate to other labor market indicators don’t hold; indeed those rules can be quite misleading.

Take initial unemployment insurance claims. As the Wall Street Journal reported the end of last month: “Analysts generally believe the economy is adding jobs when jobless claims are consistently below 400,000.” Seasonally adjusted initial unemployment insurance claims held at around 353,797 on Thursday, and they have been consistently below 400,000 since the beginning of December.

But the “below 400,000” rule only makes sense if new hiring parallels growth during past recoveries.

Forecasting the number of people employed by focusing on workers filing for unemployment insurance is like guessing a pool’s water level by measuring how much flows out but ignoring the rate at which water is being added. . . .